Depreciation Recapture

[ETAXTEAM]

How to report the sale and the depreciation recapture using this scenario?
Client owns a personal residence for past 6 years with 3 floors of which 2 floors have been rented and 1 floor used as personal residence. Depreciation was claimed for the 2 floors on Schedule E. Now the total property has been sold. Selling price $400,000, cost basis plus selling expense is $250,000 with accumulated depreciation $65,000 (total for property).

[TaxGuyBill]

Are the two rented floors a separate "Dwelling Unit" (separate kitchen, bath, sleeping, usually a separate entrance)? Was it rented the entire time, or were those two floors previously used for personal purposes (and if ever used for personal, give details)?

[ETAXTEAM]

To TaxGuyBill,
The two rented floors were separate "Dwelling Units" and rented most of the time.

[TaxGuyBill]

Treat it as two separate sales.

The home may not necessarily be split 1/3 and 2/3, but for explaining, let's assume that it is.

The personal portion of the home would be reported as a Basis of $83,333 with a selling price of $133,333 on Form 8949. Then using the $250,000/$500,000 exclusion (assuming they qualify for it), that will eliminate the tax on the personal portion.

The rental portion of the home would be reported with a starting Basis of $166,667 and a selling price of $266,667 on Form 4797. If the entire $65,000 of depreciation was for the home itself (but see note later), the total gain would be $165,000. Of that $165,000 gain, $100,000 would be long-term capital gain and the $65,000 would be Unrecaptured Section 1250 Gain (taxed at regular rates, up to 25%).

Does that make sense?


However, $65,000 of depreciation seems too high for the building itself. Does that include other things, such as appliances, carpeting, etc.?